Fitch: Sony's Profitability Remains Fragile

Fitch Ratings says Sony's financial results for the third quarter of the financial year ending March 2013 (Q3FYE13) revealed fragile profitability notwithstanding benefits associated with the peak season for the sale of electronics products and the yen beginning to weaken during the quarter. Fitch maintains its Negative Outlook and believes that the company's ratings hinge on the profitability and cash flow of its electronics businesses and debt reduction.

Over the next 12 months a weaker yen, particularly against the euro, may help
improve profitability and possibly lead to a stabilization of the outlook if it
helps EBIT margins excluding Sony Financial Holdings (SFH) rise above 1%.
However, rationalizing its diverse operation, regaining lost technological
leadership and successfully releasing "must-have" products will be
more important over the long term.

Sony's operating profit totalled JPY47bn in Q3FYE13. However, when excluding
SFH, operating profit was only JPY11bn, albeit a recovery from Q3FYE12's
operating loss of JPY17bn, and implies a very thin operating margin of 0.7%.

The improvement was driven by cost reductions following the restructuring of
its TV business and a stronger contribution by its entertainment business during
the quarter. Nevertheless Sony's entertainment business remains volatile and
cannot be relied upon to continually offset operating losses in the electronics
business segment, in Fitch's view. Moreover, Fitch is also concerned that gross
debt, excluding SFH, increased by a further 8.8% quarter-on-quarter to
JPY1,363bn in December 2012.

Sony's electronics businesses continue to face a tough environment due to
stronger competition and substitution from smartphones and tablets. The core
problem for Sony is a failure to create "must-have" products and
deterioration in the perception of the brand, relative to Korean manufacturers
in particular.

While the re-launch of its smartphone business since the beginning of FYE13
helped regain market share slightly, Sony's smartphone business has yet to gain
sufficient traction. Its market position is still substantially behind Samsung
Electronics Co., Ltd. ('A+'/Stable) and Apple, and even below Chinese vendor,
Huawei, in Q3FYE13, according to IDC data. Its Mobile Products &
Communications segment also made a substantial operating loss of JPY21bn in
Q3FYE13. In addition, future growth in its smartphone business may be at the
expense of its other products, including digital cameras, video cameras, game
devices, PCs, and digital audio players.

Excluding SFH and the entertainment businesses, the electronics businesses
recorded a high operating loss (including losses from affiliated companies) of
JPY30bn in Q3FYE13, versus a JPY17bn loss in Q2FYE13. Recovery in profitability
was hampered due to further weakness in its Imaging Products & Solutions
segment, its Game segment, as well as on-going substantial losses in its Mobile
Products & Communications segment.

Fitch expects these trends to continue during the next few quarters, and
believes that meaningful recovery will be slow, given Sony's loss of technology
leadership in key products and high competition.

Fitch views the weakening of the yen as a positive factor for Sony. The
recent weakening yen is expected to raise operating income by JPY17bn in
Q4FYE13, according to Sony, if all else stays unchanged. Sony notes that a
one-yen change in the exchange rate against the euro affects its operating
income by JPY6bn, but a one-yen change in exchange rate against the US dollar is
neutral to its operating income.

Excluding SFH, Fitch continues to expect operating EBIT margins to be
negative or minimal and funds flow from operations (FFO)-adjusted leverage to be
above 4x for FYE13 and FYE14. Significant recovery in FYE15 will depend on the
success of the company's turnaround plan.

Fitch also notes that Sony's balance sheet, excluding SFH, remained weak.
However, Sony maintains a strong liquidity profile with unrestricted cash of
JPY561bn in December 2012, covering 129% of short-term debts, all excluding SFH.
Sony also had JPY777bn unused committed line of credit facilities in December
2012.

Fitch may downgrade the rating if Sony's EBIT loss sustains and FFO-adjusted
leverage rises above 4.5x (both excluding SFH). However, Fitch will consider
revising the Outlook to Stable if EBIT margins improve to over 1% and FFO-adjusted
leverage is sustained below 4x, both excluding SFH.

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